INTRODUCTION
Mergers and acquisitions
(M&A) are no longer a new thing to the Indian Business Sector.
Today, M&A are not only a part of the business growth strategy but
have become a necessity to survive in the ever growing competition and
add value to the existing business line so as to retain as well as grow the market share.
In
India, March 2011 saw the acquisition of Henkel India by Jyothy
Laboratories. At one shot, the three-brand company leapt into the big
league with six new brands in its stable, namely, Henko, Mr. White, Fa,
Pril, Margo and Neem.
The acquisition fulfilled Jyothy's primary aim of de-risking its portfolio, which relied in a big way on a single brand, Ujala Supreme- a fabric whitener, which contributed 32 per cent to its turnover.
In
the last few years, Jyothy has tried diversifying into detergents
(Ujala washing powder, Ujala Stiff and Shine, and Ujala Technobright),
dishwash (Exo) and mosquito repellents (Maxo), but competition in these
categories has made the going tough.
With a product portfolio close to its own, Henkel fits perfectly with Jyothy's ambitious growth plans.
But
then the operational turnaround of Henkel India is a big challenge in
itself; plus the Rs. 600-crore (Rs. 6 billion) borrowings on Jyothy's
books will further test the soap and detergent maker's ability to turn
the new venture profitable.
THE COMPANIES:
Jyothy Laboratories
Jyothy Laboratories came into being in 1983 and was started by M.P. Ramachandran - the current Chairman & Managing Director.
* It
started as a proprietary concern, manufacturing and selling a single
product in a single district. The organization today stands as a
multi-brand, multi-product company with operations all over the nation.
* The company has the distinction of making a mark in the virtually non-existent category of liquid fabric whitener.
* Today,
Jyothy Laboratories Limited has a pan Indian presence with brands
catering to the needs of consumers across the length and breadth of the
nation. It has 28 manufacturing facilities in 16 locations across the
country.
* From
starting operations with a corpus of INR 40,000 to a company with a
turnover of overINR 400 crores, Jyothy Laboratories Limited has come a
long way.
Henkel India
* Henkel
India is a joint venture between Germany's âHenkel & Co.â and Spic
Group's Tamil Nadu Petro Products, with the German firm holding 51 per
cent stake.
* Henkel India., established in 1987 is a subsidiary of Henkel AG & Co. KGaA, Germany.
* Headquartered
at Chennai in India, Henkel India, operates in business areas of
Laundry, Home Care, Cosmetics, Toiletries and Hair Care.
* Henkel
operates in three categories â âlaundry and home careâ, âcosmetics and
toiletriesâ and âadhesives and sealantsâ. It comprises of national and
international brands such as:
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Pril
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Bref
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Mr. White
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Henko
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Igora Royal
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Chek
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Fa
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BC Bonacure
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Glatt & Natural Styling
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Margo
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Strait Therapy
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Osis
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FMCG SECTOR IN INDIA
* The
Indian FMCG sector, with a market size of USD 25 billion (2008â09
retail sales), constitutes approximately 2.15 per cent of Indiaâs GDP.
* The industry is poised to grow at CAGR between 10 to 12 per cent annually.
* Annual profit of FMCG sector is approximately USD 14.74 billion.
* Market growth rate â
o Rural - 40 per cent
o Urban - 25 per cent
* Average Indian spending on groceries and personal care is 48 per cent.
o Groceries - 40 per cent
o Personal Care - 8 per cent.
* Implementation
of the proposed GST and opening of FDI are expected to fuel growth of
industryâs size to USD 47 billion (Rs 2,25,000 crores) by 2013 and USD
95 billion (Rs 4,56,000 crores) by 2018.
(- data as per FICCI- TECHNOPAK Report 2008-09)
THE ACQUISITION
In
March 2011, Jyothy Laboratories Ltd. acquired 14.9 per cent stake in
Henkel India Limited, making it the single largest Indian shareholder in
the company. This strategic bid was strengthen its brand portfolio in
Urban and Rural India.
Jyothy Laboratories Ltd. (JLL) further acquired Henkel AG and Co. KGaA's 50.97 per cent stake in its Indian unit for Rs. 142.9 crores.
The
acquisition helped JL to ramp up its share in the fast-growing
detergents market, dominated by deep-pocket multinational giants Hindustan Unilever (HUL) and Procter & Gamble (P&G).
It also helped JL to strengthen their urban distribution network as
Henkel has a strong presence in modern retail formats while JL still
remains strong in the rural areas.
Unlike
many of the recent cases of mergers & acquisitions the Jyothy Lab
& Henkel India went pretty smoothly without much of twists and turns
though there were some of the minor issues.
These issues are as follows:
* Emami,
Wipro and Dabur were in competition with JLL for Henkel Indiaâs
Acquisition. More competition leading to a bidding price war for
acquisition- Higher Prices!
* The acquisition was to be EPS dilutive initially as Henkel India was suffering from losses.
* Huge
Debt (Rs 4.54 billion) of Henkel India was expected to drag down the
financials of Jyothy Laboratories in the form of Interest cost burden in
the P&L account.
But
the management was confident about its decision and decided to go ahead
with the acquisition as the expected combined benefits in the long term
were comparatively more than the short term problems.
The
acquisition being fairly recent, itâs too soon to comment on it, though
we can look out for the synergies, the possible benefits to be achieved
as well as the problems which may arise.
It is only time which will tell how right or wrong this decision was.
FINANCIALS
* In
March 2011, Jyothy Laboratories bought 1,73,51,686 (14.9 per cent)
shares at Rs.35 each of Henkel India Limited from SPIC group company
Tamil Nadu Petroproducts Ltd. (TNPL).
* The entire transaction was an all cash deal amounting to Rs. 60.73 crores.
* The company later participated in the bidding process to gain Henkel AG's 50.9% stake in Henkel India Limited.
* In line with the plan, Jyothy Laboratories offered to buy Henkel AG's 50.97 per cent stake in Henkel India at a discount after it paid Rs 35 per share to snap up the earlier 14.9 per cent stake from the latter's joint venture partner A C Muthiah.
* In May 2011, JLL bought Henkel AG's majority stake in Henkel India for Rs. 617 crores, including debt and preference shares.
* JLL paid Rs. 118.7 crores, or Rs. 20 for each share, for the German firm's 50.97% stake in Henkel India.
* JLL
also agreed to assume and refinance Henkel's Rs. 454-crore debt and buy
more than 68 million preference shares worth Rs. 43.9 crores.
* The total costs of the deal went to a total of around Rs. 678 crores where in JLL acquired 65.69 per cent stake in Henkel India.
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SYNERGIES
* Diversified Product Portfolio:
JLL
through the acquisition fulfilled its primary aim of de-risking its
portfolio, which relied in a big way on a single brand, Ujala Supreme- a
fabric whitener, which contributed 32 per cent to its turnover.
With
Henkel to its side JLL- a three-brand company, at one shot, leapt into
the big league with six new brands in its stable, namely, Henko, Mr.
White, Fa, Pril, Margo and Neem.
* Branding and Manufacturing Synergies- Common Presence:
Both
Jyothy Laboratories and Henkel India have synergy in various business
segments, as both are present in Home Care, Fabric Care, Dish wash,
Personal Care and Household cleaning segments.
Manufacturing
was to be the first area of rework. Product formulations remained the
same, but manufacturing was decentralized for Henkel brands. The 28
factories that Jyothy Labs had at its disposal, absorbed the Henkel
brands.
Investments were made to the tune of Rs. 5-10 crore (Rs. 50-100 million) on packaging lines and a high-end laboratory facility.
By
trimming the 20-odd contract manufacturers of Henkel and moving
production of Henkel brands in-house, JLL expected gross margins to
touch 38 per cent by the end of 2011.
* Stronger Distribution Network:
The
acquisition helped to strengthen JLLâs urban distribution network, as
Henkel has a strong presence in modern retail formats. While Jyothy is
more rural-oriented with sales mix being 65:35 in favor of rural and
urban, Henkel is more urban centric with a ratio of 75:25.
As
per the statements given out by JLL, they plan to achieve a sales mix
of the merged entity as 50:50 for rural and urban by 2012-13. However,
it is to be skewed more in favor of rural area thereafter, since 70 per
cent of Indiaâs 1.2 billion population lives in rural areas and there is
immense scope to improve availability of products.
With a reconfigured supply chain, logistics costs will drop drastically. JLL's target is to reduce logistics costs from 7-8 per cent of sales to 4 per cent.
* Management Abilities:
JLL
is known for its management quality and the company is very sure about
the success of the merger. The performance of JLL over the years has
shown that the management of JLL has the ability to turnaround the
business operations for Henkel India Ltd.
* Taxation:
The
acquisition and merger of JLL and Henkel India will be advantageous for
JLL as the accumulated losses of Henkel India will come handy to save
on taxes.
* Raw material synergies:
Raw
material synergies are expected to reduce costs as unlike in the past,
Jyothy does not have an obligation to source a key ingredient for
detergents- LAB (i.e., linear alkyl benzene), from Tamilnadu
Petroproducts.
Purchases for both the companies will follow the Jyothy way - cash and carry
- to ensure better leverage at the time of negotiation. This will, over
a period of time, drive down material and procurement costs, positively
impacting overall EBITDA
(earnings before interest tax depreciation and amortization) margins
which have been in the negative for Henkel India since inception.
* Combined Office:
Jyothy
planned to shift the corporate office to Henkel Indiaâs Mumbai premises
in September from Chennai, saving the company Rs. 1.5 crores in rent, a
year.
Summary for synergies:
The
Jyothy success story has many components, but the key ingredient has
been its ability to focus its efforts sharply on its key brands, and
build volumes market by market.
This
has allowed it an ability to invest in these brands as well to keep its
eye on sustaining a product advantage vis-a-vis its competitors.
The
challenge for Jyothy is to display the same intensity of effort behind
the Henkel brands. It would perhaps make sense for it to clearly spell
its ambitions for each brand and category and to sharply prioritize it's
actions.
For
a company like Jyothy, it would be a mistake to spread its efforts
thinly, and to toggle between the new brand assets it has acquired. That
is what the problem with Henkel was and that is also what Jyothy is not
naturally good at. It needs to take things category by category and aim
for significant share gains in selected categories.
Having
set its priorities, there is a need to build powerful ideas behind the
selected brands. The current Henkel approach has been a pronouncedly
me-too one, staying content with mimicking category leaders weakly and
that is simply not good enough to continue.
JLL
will need to be braver and take more chances; it needs to try and
redefine some accepted category truths and operate as a feisty
challenger that is at the forefront of innovation, be it in terms of the
product or its marketing.
This
is easier said than done, for the categories in question are extremely
mature and well-established and do not offer too many easy opportunities
for change.
REASONS FOR DISAPPOINTMENT
* The acquisition was to be EPS dilutive initially as Henkel India was suffering from losses. It has witnessed consolidated net loss of Rs. 518 million in CY 2010. Their accumulated loss stood at Rs. 3,657 million.
* Jyothy
Laboratories is a debt-free company. Huge Debt (Rs 4.54 billion) of
Henkel India is expected to drag down the financials of Jyothy
Laboratories in the form of Interest cost burden in P&L. Henkel
India also has got a Rs 680 million preferential allotment from the
parent, which may be adding up to the debt.
* In
a bid to buy out the German parent`s - Henkel AG balance 50.9% stake,
Jyothy Laboratories ran the risk of being caught in a bidding war that
would have increased its acquisition cost.
But
later when Jyothy Labs picked up Spic chairman Muthiah's shares even as
Henkel AG launched a bidding process to sell its stake in the Indian
unit- a section of the analysts said that Jyothy may have created enough
deterrence to dissuade other potential bidders and could be aggressive
on price negotiations with Henkel.
THE SHARE MARKET
* The
Jyothy Laboratories stock closed the day at Rs.228, down by Rs.1 or
0.44%. The stock hit an intraday high of Rs.233 and low of Rs.227.
* The total traded quantity was 653 compared to 2 week average of 3859.
* The
Henkel India stock closed the day at Rs.45.35, up by Rs.2.15 or 4.98%.
The stock hit an intraday high of Rs.45.35 and low of Rs.43.90.
* The total traded quantity was 1.37 lakhs compared to 2 week average of 1.35 lakhs.
JLLâs DECISION: RIGHT or WRONG?
There
is no one way to describe the decision and as mentioned only time will
be able to tell whether the decision was right or wrong.
But, on paper, the acquisition seems a great option for JLL as:
* JLL gets a bigger and better product portfolio
* The considered synergies are supposed to work in JLLâs favor
* The
fact that JLL acquired Henkel India at a discounted price of Rs. 20
(which was almost half of the existing price of Henkel) is also to be
considered.
* The post acquisition figures reflected by Henkel can also be taken as a sign in favor of Jyothy Labs.
CONCLUSION
Overall
the acquisition seems to be a win-win scenario for JLL. Though the
yearly performances are yet to come out, the synergies have already
started working. The JLL management has handled the case very well and
its forecasts and expectations if brought into reality will be a great
factor in taking JLL to new heights in row of Multinational Giants like
HUL, P&G etc.